Susquehanna International Group (SIG) said the robust chocolate industry will likely turn Hershey’s business around later this year even though the company is among ‘the worst performing CPG stocks in the last three months.’

Analysts at the global quantitative trading firm said Hershey’s share weakness is caused by investors’ concerns about the US chocolate category growth, increasing doubts about the company’s ability to meet fiscal year 2018 guidance and rising cocoa costs among other factors.

However, “We think most of these concerns are overdone and would expect the stock to trade up in the months ahead,”​ said Pablo Zuanic, senior equity analyst at SIG.

Chocolate outperforms overall CPG industry

He also cited some data from an industry overview presentation delivered at the recent NCA (National Confectioners Association) seminar.

“The $35bn US confectionery category outpaced total store growth in 2017 – 1.8% year-over-year, with grocery/Walmart having a relatively strong year ahead of c-stores, drug, etc.”​ said Zuanic. “The growth was supported by an improved economic landscape.”​

In IRI channels, Hershey’s dollar sales grew 3.3% on average over the last five years, which was ahead of the totally industry growth, said Zuanic.

Innovation to offset underperformance around Easter

Even though Hershey forecasted its 2018 organic sales growth to be 2% with a five-point benefit from its acquisition of Amplify Snacks​​, SIG predicted the company’s Q1 2018 organic growth to decline by 1.1% due to “slight underperformance around Easter.”​

“So far, for the 12 weeks through March 11, Hershey grew 1.6% and the rest of the industry grew 2.1%,”​ said Zuanic. “Seasonal was stronger than normal for the industry in Q1, and thus Hershey underperformed.”​

“But we would not read too much into this share month-to-month data, especially with Hershey outlining a strong innovation pipeline for the rest of the year,” ​he added.

Cycle through lower cocoa costs

Zuanic said cocoa prices hiked up again in Q4 2017 after declining for the last two years.

The average cocoa prices peaked at $3.2/kg in late 2015 and dropped all the way to $1.95 in Q2 2017 and Q3 2017, he noted. They are up since then to $2.04 in Q4 2017 and $2.17 in Q1 2018, and futures point to $2.50 for Q2 and Q3 2018.

“Higher cocoa costs will not hit Hershey’s P&L (profit and loss statement) until H1 2019… as we estimate the company is still cycling through lower cocoa costs in H2 2017,”​ Zuanic explained.

Hershey’s products are not “hand to mouth; it hedges a large portion of its needs… we understand six to 12 months in advance,”​ he said.